28 Apr 2016
Brazil: No rate cut on sight but if… - TDS
Yesterday, the central bank of Brazil, left interest rate unchanged as expected. According to Sacha Tihanyi, Senior EM Strategist at TD Securities, the possibility of a June rate cut depends on whether the potential interim president Temer replaces the Brazil Central Bank governor.
Key Quotes:
“The BCB decision saw the two dissents for a rate hike removed, but introduced wording suggesting no chance for
a June cut.”
“Interestingly, the BCB also very intentionally sounded somewhat hawkish on the outlook, likely in order to offset any mistaken market interpretation that a rate cut would be imminent, considering that the market has been pricing a bias for a potential cut.”
“We believe that this certainly means that the June policy meeting is completely off the table in terms of monetary easing under the current BCB leadership. We still feel that easing in Q4 would be most likely with 50bps, however much is politically dependent.”
“Without reform from the government, it is still possible that the BCB cuts, but the sustainability and depth of the easing cycle will be significantly constrained.”
“We think that the only chance that there is for easing in the near term would come from the potential for the (presumably) incoming Temer government to appoint a new BCB governor (but not completely revamp the board) who may be amenable to engaging in monetary easing if the government shows strong fiscal reform intentions, with a high likelihood of execution of any such program.”
Key Quotes:
“The BCB decision saw the two dissents for a rate hike removed, but introduced wording suggesting no chance for
a June cut.”
“Interestingly, the BCB also very intentionally sounded somewhat hawkish on the outlook, likely in order to offset any mistaken market interpretation that a rate cut would be imminent, considering that the market has been pricing a bias for a potential cut.”
“We believe that this certainly means that the June policy meeting is completely off the table in terms of monetary easing under the current BCB leadership. We still feel that easing in Q4 would be most likely with 50bps, however much is politically dependent.”
“Without reform from the government, it is still possible that the BCB cuts, but the sustainability and depth of the easing cycle will be significantly constrained.”
“We think that the only chance that there is for easing in the near term would come from the potential for the (presumably) incoming Temer government to appoint a new BCB governor (but not completely revamp the board) who may be amenable to engaging in monetary easing if the government shows strong fiscal reform intentions, with a high likelihood of execution of any such program.”